Advice re. house purchase no.3

T

TalkCents

Registered User
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Hi,

Myself and my wife are in a situation where we both had properties before we were married and now live in one of them after a period of living away and renting both.

House 1. (currently living in)
Mortgage remaining €200k SVR
Value €180k

House 2. (rented @ 600 per month)
Mortgage Remaining €110k Tracker
Value €130k

We have combined salary of €135k, and savings of €200k (50k on longer term deposit).

We are looking at purchasing a house for €300k, with a mortgage of €200k. Keeping both houses and renting out house 1 for between 900-1000 per month - the bank have not said if necessary to pay €20k off mortgage on house 1 to bring out of negative equity. The bank have been very positive about getting a mortgage and we have just sent in our paperwork.

Just wondering if we are mad to think about taking on the extra commitment, I have seen some scenarios that people have dones the maths on before and they are very helpful.

TIA.
 
Any chance you could move back into House 2 and avail of a tracker mover product? It's just ok - nothing special - as a rental.

I would be very surprised if House 1 made any sense at all as a rental.
 
You have a huge exposure to property. What are you both doing with regard to pension provision?
 
Here is the current position:

upload_2016-8-3_8-3-46.png


Here is the position after your purchase:

upload_2016-8-3_8-4-26.png


Having net borrowings of €410 on a salary of €135k is not excessive in general. In your case, it's not excessive because you can reduce your borrowings by €310k simply by selling houses 1 and 2. A further reason why it's not excessive, is that your repayments on €110k of the borrowings are very small as it's a tracker.

So you are not mad taking on the extra commitment.

You should evaluate each of the investments individually.

I agree with Sarenco - I doubt if House 1 is worth keeping and this is a very good time to sell it. You have been living in it, so it's presumably in good condition. You won't have the hassle of finding tenants. The only reason to rent it is that there would be no Capital Gains Tax on any increase in the value up to the price you paid for it. But this is not that significant an issue to worry about.


House 2 is probably a very good investment at the moment.
Rental income: €7,200
Interest: €1,000 (€110k @1%)
Profit before expenses and taxes: €6,000

I think you should keep this. But review the decision every couple of years. As the equity increases, tracker backed mortgages become a less good investment.

Is the €300k your final house?
This is a very important issue. You could easily afford a €400k house. Obviously there is no point in buying a bigger house than you need, but it's better to overbuy than to underbuy and face trading up again after a few years.

If you do buy a €400k house, you must definitely get rid of House 1. Transferring the tracker from House 2 becomes more attractive than keeping it as an investment as well.

This would be the position:
upload_2016-8-3_8-18-29.png


50% LTV and less than twice your income. Very conservative.

You should not be keeping any cash other than around €10k

Why on earth are you keeping €100k in cash? You are probably paying around 3.3% on your mortgage and earning almost nothing on the deposit. You should pay down your SVR mortgage on your home in full.

You should temporarily borrow the maximum allowed by EBS

Let's say you buy a house for €300k.
You should ask EBS for a €240k mortgage
They will give you 2% cash back or €4,800
You should then use your savings to pay down the mortgage without penalty.
 
Sarenco said:
Any chance you could move back into House 2 and avail of a tracker mover product? It's just ok - nothing special - as a rental.

I would be very surprised if House 1 made any sense at all as a rental.
Click to expand...

House 2 isn't an option to live - wrong area and too small.

Neither property were bought as investment properties we both lived in them before we met, bought were bought around 2006 hence crazy prices.
 
Sarenco said:
Any chance you could move back into House 2 and avail of a tracker mover product?
Click to expand...

If your lender allows tracker movers, I think that they will probably allow you to move this as it was originally your home.

But it's not a big issue for you.

If you are currently on a tracker of ECB +0.5%, you will be paying a rate of 1.5% after your move instead of the 3.3% you would otherwise pay. So a difference of 2% on €110k is €2,200 a year. Worth getting if you can, but only a small consideration in the bigger decision.



Brendan
 
Brendan Burgess said:
Here is the current position:

View attachment 1442

Here is the position after your purchase:

View attachment 1443

Having net borrowings of €410 on a salary of €135k is not excessive in general. In your case, it's not excessive because you can reduce your borrowings by €310k simply by selling houses 1 and 2. A further reason why it's not excessive, is that your repayments on €110k of the borrowings are very small as it's a tracker.

So you are not mad taking on the extra commitment.

You should evaluate each of the investments individually.

I agree with Sarenco - I doubt if House 1 is worth keeping and this is a very good time to sell it. You have been living in it, so it's presumably in good condition. You won't have the hassle of finding tenants. The only reason to rent it is that there would be no Capital Gains Tax on any increase in the value up to the price you paid for it. But this is not that significant an issue to worry about.


House 2 is probably a very good investment at the moment.
Rental income: €7,200
Interest: €1,000 (€110k @1%)
Profit before expenses and taxes: €6,000

I think you should keep this. But review the decision every couple of years. As the equity increases, tracker backed mortgages become a less good investment.

Is the €300k your final house?
This is a very important issue. You could easily afford a €400k house. Obviously there is no point in buying a bigger house than you need, but it's better to overbuy than to underbuy and face trading up again after a few years.

If you do buy a €400k house, you must definitely get rid of House 1. Transferring the tracker from House 2 becomes more attractive than keeping it as an investment as well.

This would be the position:
View attachment 1444

50% LTV and less than twice your income. Very conservative.

You should not be keeping any cash other than around €10k

Why on earth are you keeping €100k in cash? You are probably paying around 3.3% on your mortgage and earning almost nothing on the deposit. You should pay down your SVR mortgage on your home in full.

You should temporarily borrow the maximum allowed by EBS

Let's say you buy a house for €300k.
You should ask EBS for a €240k mortgage
They will give you 2% cash back or €4,800
You should then use your savings to pay down the mortgage without penalty.
Click to expand...

Thank you so much Brendan for your workings, it is certainly food for thought.

Thinking around keeping House 1, possibly flawed that at current interest rates there is very little profit/tax due. The shortfall in mortgage v. rental income plus upkeep will probably be €4k per annum for the next 17 years, c. €70k, I know a lot of things can change in that period. At the end of that period we will have an asset/rental income with no outgoings.

The other potential for this money would be to put an additional €8k in our pension (€4k after tax relief).
 
TalkCents said:
House 2 isn't an option to live - wrong area and too small.

Neither property were bought as investment properties we both lived in them before we met, bought were bought around 2006 hence crazy prices.
Click to expand...

I know PTSB allow borrowers to move trackers from former PPRs that are subsequently rented out and other lenders might be willing to do so on a case-by-case basis.

The decision to retain House 2 as a rental or to sell it and port the mortgage to your new PPR looks finely balanced - neither would be a "wrong" decision on the face of it. However, I can't see the appeal of retaining House 1 as a rental - it will be significantly cash-flow negative for a long time and only modestly profitable, at best, on an after-tax basis.

I think you would be better advised to sell House 1 (using ~€20k of your savings to address the NE) and to use the freed up cash-flow to increase your pension contributions and/or pay down the mortgage on your new PPR ahead of schedule.

Agree with Brendan that you shouldn't retain too much in the way of a cash reserve while carrying a mortgage (particularly a non-tracker mortgage) - ~€10k looks about right in your circumstances. The EBS 2% cash-back offer, employed as suggested, also looks like the best deal in your circumstances.
 
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